EDITOR'S NOTE: This legislative update follows up on the previous article, "Prepayment Penalties and Federal Preemption: A Legal Enigma."

Federal Borrowing and Lending

Amended Code of Federal Regulations Sections: 12 CFR §§ 7.4007, 7.4008, 7.4009, 34.3, & 34.4. Effective Date: 30 days after date of publication in Federal Register.

The Office of the Comptroller of the Currency issued a final rule on January 6, 2004, amending Parts 7 and 34 of Chapter I of Title 12 of the Code of Federal Regulations. The final rule adds provisions clarifying the applicability of state law to national banks' operations. The new provisions discuss state laws that are preempted, as well as the types of state laws that are not preempted, with respect to national banks' lending, deposit-taking, and other operations. Part 34 deals with real estate loans, which are defined in 12 USC § 371 as "loans or extensions of credit secured by liens on interests in real estate." Part 7 on the other hand, deals with non-real estate loans, which are loans that are not secured with real estate. Thus, the final rule affects both real estate loans such as mortgages as well as non-real estate loans such as car loans.

The amendments to Part 7 confirm that state laws pertaining to the following subjects are not preempted "to the extent that they only incidentally affect the exercise of national banks" ... powers: (1) Contracts; (2) Torts; (3) Criminal law; (4) Rights to collect debts; (5) Acquisition and transfer of property; (6) Taxation; (7) Zoning; and (8) Any other law the effect of which the OCC determines to be incidental to the ... operations of national banks or otherwise consistent with the powers set out in paragraph (a) of this section." The amendments preempt state laws "that obstruct, impair, or condition a national bank's ability to fully exercise its ... powers." Section 7.4008 then makes the following statement of laws that are specifically preempted:

[a] national bank may make non-real estate loans without regard to state law limitations concerning:
 

(i) Licensing, registration (except for purposes of service of process), filings, or reports by creditors;

(ii) The ability of a creditor to require or obtain insurance for collateral or other credit enhancements or risk mitigants, in furtherance of safe and sound banking practices;

(iii) Loan-to-value ratios;

(iv) The terms of credit, including the schedule for repayment of principal and interest, amortization of loans, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan;

(v) Escrow accounts, impound accounts, and similar accounts;

(vi) Security property, including leaseholds;

(vii) Access to, and use of, credit reports;

(viii) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents;

(ix) Disbursements and repayments; and

(x) Rates of interest on loans.
 

The amendments to Part 34 are very similar to those in Part 7. First, Part 34 states "except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank's ability to fully exercise its Federally authorized real estate lending powers do not apply to national banks. Specifically, a national bank may make real estate loans under 12 USC § 371 and 12 CFR § 34.3, without regard to state law limitations concerning:

(1) Licensing, registration (except for purposes of service of process), filings, or reports by creditors;

(2) The ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements or risk mitigants, in furtherance of safe and sound banking practices;

(3) Loan-to-value ratios;

(4) The terms of credit, including schedule for repayment of principal and interest, amortization of loans, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan;

(5) The aggregate amount of funds that may be loaned upon the security of real estate;

(6) Escrow, impound, and similar accounts;

(7) Security property, including leaseholds;

(8) Access to and use of credit reports;

(9) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents;

(10) Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages;

(11) Disbursements and repayments;

(12) Rates of interest on loans;

(13) Due-on-sale clauses except to the extent provided in 12 USC § 1701j-3 and 12 CFR § 591; and

(14) Covenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan."

Part 34 allows states to pass laws on the following subjects because they are not inconsistent with the real estate lending powers of national banks and apply to national banks to the extent that they only incidentally affect the exercise of national banks' real estate lending powers: (1) Contracts; (2) Torts; (3) Criminal law; (4) Homestead laws specified in 12 USC § 1462a(f); (5) Rights to collect debts; (6) Acquisition and transfer of real property; (7) Taxation; (8) Zoning. The OCC also reserved to itself the right to declare other areas of state law not preempted by this rule in the future.

Whether prepayment penalties are preempted by this amendment is still up for debate. Section (4) in part 34 would appear to include prepayment penalties as this section generally addresses the terms for repayment. However, nowhere in the amendments are prepayment penalties specifically mentioned. Further, John D. Hawke, Jr., the Comptroller of the Currency, made the following statement: "[t]he list of the types of preempted state laws is not intended to be exhaustive, and we retain the ability to address other types of state laws by order on a case-by-case basis, as appropriate, to make determinations whether they are preempted under the applicable standards." Thus, if prepayment penalties are not considered to be included in sections (iv) and (4) then it may take a lawsuit to determine whether prepayment penalties are preempted.

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